When the market tanks, what happens to cash flow?

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Pocket Cruiser
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When the market tanks, what happens to cash flow?

Post by Pocket Cruiser »

If one buys $1M worth of index funds today yielding 2%, or $20k per year, what would happen to the cash flow tomorrow if the market drops by 50%?

Would the yield rise to 4% yielding the same amount of cash per year? Or, would the cash flow decrease because companies would probably start slashing dividends?
RNJ
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Re: When the market tanks, what happens to cash flow?

Post by RNJ »

Wouldn't it depend on what precipitated the drop?
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Re: When the market tanks, what happens to cash flow?

Post by Pocket Cruiser »

I would think so.

I tried finding information on what yields did from 07-09 with no luck. anyone have that information?
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Re: When the market tanks, what happens to cash flow?

Post by sjb19 »

http://www.multpl.com/s-p-500-dividend-yield/

Dividends more stable than share price.
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Re: When the market tanks, what happens to cash flow?

Post by DSInvestor »

Here's a link to yahoo finance page show dividend history of vtsmx total stock market investor shares:
http://finance.yahoo.com/q/hp?s=VTSMX&a ... f=2014&g=v

To look up similar data for other funds, look up the fund, click historical prices, then click dividends only.
Last edited by DSInvestor on Tue Jan 28, 2014 3:28 pm, edited 1 time in total.
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Re: When the market tanks, what happens to cash flow?

Post by Pocket Cruiser »

Very interesting. Thanks
sjb19 wrote:http://www.multpl.com/s-p-500-dividend-yield/

Dividends more stable than share price.
DSInvestor wrote:Here's a link to yahoo finance page show dividend history of vtsmx total stock market investor shares:
http://finance.yahoo.com/q/hp?s=VTSMX&a ... f=2014&g=v
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Re: When the market tanks, what happens to cash flow?

Post by robertalpert »

Perhaps it's similar to bond yield: inversely related to share price??
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Re: When the market tanks, what happens to cash flow?

Post by ogd »

aws316 wrote:Would the yield rise to 4% yielding the same amount of cash per year? Or, would the cash flow decrease because companies would probably start slashing dividends?
In the short term, the cash flow should stay constant barring the most immediate and severe financial shocks (not seen since the Great Depression, probably). In the long term though, the dividends are expected to follow suit, because the same underlying factor (earnings) is driving both, with the share price anticipating earnings and the dividends lagging.
robertalpert wrote:Perhaps it's similar to bond yield: inversely related to share price??
Not really. Cash flow, as the OP asked, is independent of the share price in the short term and correlated in the long term. Yield, which might be what you're thinking of, would be inversely correlated in the short term (but by a factor of 1x, not bond duration), but independent in the long term.

At least, if you believe that share prices mean anything, which I very much do.
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Re: When the market tanks, what happens to cash flow?

Post by Kevin M »

i think I read in one of William Bernstein's e-booklets that dividends were cut in half when stocks declined 90%, so he recommends counting half of your dividends as part of your liability matching portfolio.

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Re: When the market tanks, what happens to cash flow?

Post by robertalpert »

ogd wrote:
aws316 wrote:Cash flow, as the OP asked, is independent of the share price in the short term and correlated in the long term. Yield, which might be what you're thinking of, would be inversely correlated in the short term (but by a factor of 1x, not bond duration), but independent in the long term.

At least, if you believe that share prices mean anything, which I very much do.
I think that is correct for stocks in general. I'm sure there are certain companies that are committed to never decreasing dividend yield (eg PG). There is probably an etf out there somewhere that specializes in companies with non-decreasing dividend yields.
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Re: When the market tanks, what happens to cash flow?

Post by dbr »

ogd wrote:
robertalpert wrote:Perhaps it's similar to bond yield: inversely related to share price??
Not really. Cash flow, as the OP asked, is independent of the share price in the short term and correlated in the long term. Yield, which might be what you're thinking of, would be inversely correlated in the short term (but by a factor of 1x, not bond duration), but independent in the long term.

At least, if you believe that share prices mean anything, which I very much do.
Yes, although apparently the actual history of stock dividends over the last century is that dividend yield has fallen from a norm of about 5% to more like half that in recent decades. I think the changeover comes in around 1980 or so.
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Re: When the market tanks, what happens to cash flow?

Post by sjb19 »

robertalpert wrote:
ogd wrote:
aws316 wrote:Cash flow, as the OP asked, is independent of the share price in the short term and correlated in the long term. Yield, which might be what you're thinking of, would be inversely correlated in the short term (but by a factor of 1x, not bond duration), but independent in the long term.

At least, if you believe that share prices mean anything, which I very much do.
I think that is correct for stocks in general. I'm sure there are certain companies that are committed to never decreasing dividend yield (eg PG). There is probably an etf out there somewhere that specializes in companies with non-decreasing dividend yields.
Be careful of terminology here. Proctor & Gamble and other dividend growth companies focus on increasing their dividend per share each year, as in dollars and cents. They have little control over the actual yield, expressed in % of share price, that it represents. I think most dividend-paying companies target a chosen payout ratio (dividend per share / earnings per share) rather than yield. Of course at constant P/E ratios they would give the same result.
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Re: When the market tanks, what happens to cash flow?

Post by ogd »

robertalpert wrote:
ogd wrote:
aws316 wrote:Cash flow, as the OP asked, is independent of the share price in the short term and correlated in the long term. Yield, which might be what you're thinking of, would be inversely correlated in the short term (but by a factor of 1x, not bond duration), but independent in the long term.

At least, if you believe that share prices mean anything, which I very much do.
I think that is correct for stocks in general. I'm sure there are certain companies that are committed to never decreasing dividend yield (eg PG). There is probably an etf out there somewhere that specializes in companies with non-decreasing dividend yields.
Being committed and actually being able to do it are very different things. In a pinch, the dividend will have to go -- admittedly, after other sources of cuts are exhausted -- but long before bond holders and other creditors take a haircut.

Beware of drawing conclusions from only companies that have done well, they're gonna be tautological. If you take BP for example, it was just as committed to dividends, until a $50 billion hole opened up in its finances overnight. You don't hear it mentioned too much in dividend growth stories.

Finally, I don't like the thought that a part of the market invests according to financial accounting moves made by executives. They know this and their compensation is denominated in shares, and I'd hate it if they elect to use cash that they need for dividends so as not to get penalized. I.e. the commitment could be a problem sometimes.
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Re: When the market tanks, what happens to cash flow?

Post by Majormajor78 »

There is another thread on this same topic from about 8 months ago or so. According to some of the posts the yield of the S&P 500 dropped about 21% in 2009 and took a few years to recover. Considering the drop in stock prices were greater than 50% the cash flow was much more stable but still vulnerable to the downturn. I'd recommend you read that thread and see if the arguments and data presented make sense. I didn't do any fact checking other than a quick read through the content.

http://www.bogleheads.org/forum/viewtop ... 1&t=116271
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Re: When the market tanks, what happens to cash flow?

Post by roymeo »

What are these "index funds" invested in? Stocks? Bonds? Both? Neither? Utilities?

Looking at the history of the fund(s), what's the consistency of the "yield"? What's the yield come from? Is this yield something that's written in to the charter of the fund(s) or is it counter to the charter (tax-efficiency)?

I'm not sure how to answer your original question without a lot more info on what these " index funds today yielding 2%" would be.

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Re: When the market tanks, what happens to cash flow?

Post by dbr »

roymeo wrote:What are these "index funds" invested in? Stocks? Bonds? Both? Neither? Utilities?

Looking at the history of the fund(s), what's the consistency of the "yield"? What's the yield come from? Is this yield something that's written in to the charter of the fund(s) or is it counter to the charter (tax-efficiency)?

I'm not sure how to answer your original question without a lot more info on what these " index funds today yielding 2%" would be.

roymeo
The Vanguard S&P 500 currently yields 1.95% SEC, and total US market fund 1.80%, so those could be examples of stock funds that the OP is presumably talking about.
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Re: When the market tanks, what happens to cash flow?

Post by Call_Me_Op »

aws316 wrote:If one buys $1M worth of index funds today yielding 2%, or $20k per year, what would happen to the cash flow tomorrow if the market drops by 50%?

Would the yield rise to 4% yielding the same amount of cash per year? Or, would the cash flow decrease because companies would probably start slashing dividends?
Yes. Initially, there should be no change in the absolute dividend payments. The fact that the yield may increase is irrelevant. Over time, dividends may increase or decrease depending upon what precipitated the market crash and other factors.
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Re: When the market tanks, what happens to cash flow?

Post by DonCamillo »

aws316 wrote:If one buys $1M worth of index funds today yielding 2%, or $20k per year, what would happen to the cash flow tomorrow if the market drops by 50%?

Would the yield rise to 4% yielding the same amount of cash per year? Or, would the cash flow decrease because companies would probably start slashing dividends?
If you are a Boglehead, investing in broad index funds for your stocks, the yield would increase immediately to 4%, then begin to drop if the economic conditions that caused the crash affect company profits and cause some of them to cut or eliminate dividends.

But there are some defensive sectors, especially regulated utilities, that tend to be relatively stable dividend payers even in market corrections. if these have a history of increasing dividends, they will probably continue even after a correction.

What bothers me most about index investing is investing in known losers, like Kodak during the shift from film to digital, AT&T as long distance went from 25 cents a minute to $15 a month for all you can eat, Dell as Apple tablets displaced most PCs, Blackberry after they failed repeatedly to compete with smart phones, and traditional retailers who have proved unable to compete with Amazon. I wish there was an index that did not include stocks with one foot in the grave and another on a banana peel. Why should we invest in Buggy Whip manufacturers and Trolley Lines?
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Re: When the market tanks, what happens to cash flow?

Post by kenyan »

DonCamillo wrote:
aws316 wrote:If one buys $1M worth of index funds today yielding 2%, or $20k per year, what would happen to the cash flow tomorrow if the market drops by 50%?

Would the yield rise to 4% yielding the same amount of cash per year? Or, would the cash flow decrease because companies would probably start slashing dividends?
If you are a Boglehead, investing in broad index funds for your stocks, the yield would increase immediately to 4%, then begin to drop if the economic conditions that caused the crash affect company profits and cause some of them to cut or eliminate dividends.

But there are some defensive sectors, especially regulated utilities, that tend to be relatively stable dividend payers even in market corrections. if these have a history of increasing dividends, they will probably continue even after a correction.

What bothers me most about index investing is investing in known losers, like Kodak during the shift from film to digital, AT&T as long distance went from 25 cents a minute to $15 a month for all you can eat, Dell as Apple tablets displaced most PCs, Blackberry after they failed repeatedly to compete with smart phones, and traditional retailers who have proved unable to compete with Amazon. I wish there was an index that did not include stocks with one foot in the grave and another on a banana peel. Why should we invest in Buggy Whip manufacturers and Trolley Lines?
Those "known losers" are value stocks. These equities historically earn more than the "known winners." If you want to avoid those types of stocks, stick to Growth Indices.
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Re: When the market tanks, what happens to cash flow?

Post by ogd »

DonCamillo wrote:What bothers me most about index investing is investing in known losers, like Kodak during the shift from film to digital, AT&T as long distance went from 25 cents a minute to $15 a month for all you can eat, Dell as Apple tablets displaced most PCs, Blackberry after they failed repeatedly to compete with smart phones, and traditional retailers who have proved unable to compete with Amazon.
It is much better to have invested in said companies after said events than before, when they were on top of their game and everything was looking rosy. Such can be the fate of growth stocks. Whatever mixed gains & losses you might have taken in Blackberry in 2013, they are nothing compared to having bought Blackberry at the height of its power.

I've found that the grand illusions of one's ability to pick good companies are much easier to keep a lid on if one reframes the question as one's ability to pick good prices.
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Re: When the market tanks, what happens to cash flow?

Post by random_walker_77 »

DonCamillo wrote: What bothers me most about index investing is investing in known losers, like Kodak during the shift from film to digital, AT&T as long distance went from 25 cents a minute to $15 a month for all you can eat, Dell as Apple tablets displaced most PCs, Blackberry after they failed repeatedly to compete with smart phones, and traditional retailers who have proved unable to compete with Amazon. I wish there was an index that did not include stocks with one foot in the grave and another on a banana peel. Why should we invest in Buggy Whip manufacturers and Trolley Lines?
Do you remember apple computer back around 1997, prior to introducing the iMac? For a while there, it looked like apple was a goner. A loser. A niche player that was losing out. There were articles about whether apple had enough runway left to turn itself around before it went bankrupt.

I couldn't tell then that Apple was *not* going to be a loser. I couldn't tell then that, rather than being a loser, it would've been a great idea to pump all my money into apple. But I know now that I own both the winners and the losers, courtesy of indexing. And I've made peace with myself that getting the "average", minus a smidgeon in fees, is good enough for me. (and better than most people will get)
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Re: When the market tanks, what happens to cash flow?

Post by abuss368 »

A few notes and some of this was apparent in the 2008 - 2009 downturn.

1) Companies can cut their dividends if the cash flow is not there due to the related revenues and profits decreasing.

2) REITs must pay 90% of their income as dividends to be a REIT. So that cash flow to an investor can be stable. Some REITs went out of business (more mortgage REITs).

3) Bonds are there for the safety and income. This was another reason why I had no use for the Intermediate TIPS fund. The fund dropped in the downturn (and 9% last year), and stopped a large part of it's income which was already inconsistent. Total Bond Index and Intermediate Term Tax Exempt provided that cash flow each and every month.

4) If the economy tanks, the Federal Reserve can/will reduce interest rates as will the overall market. Granted a bond fund will already have existing holdings, but as they mature they may be replaced with lower yielding bonds. This can impact your cash flow.

5) No need for money markets as they do not pay anything.
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Re: When the market tanks, what happens to cash flow?

Post by DonCamillo »

Thanks to Kenyan, ogd, and Random Walker

I feel better about my index funds now. Before, I just considered that the known losers were a small part of the market, and accepted that as the price of index investing. But I became very sensitive to losers after having several companies that I owned individually, Pan Am, Xebec, Corus Bancorp, and Wachovia go under.
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